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Agency, Firm Growth, and Managerial Turnover

Author

Listed:
  • Ronald W. Anderson

    (London School of Economics and Political Science (LSE))

  • Cecilia Bustamante

    (London School of Economics and Political Science (LSE))

  • Stéphane Guibaud

    (London School of Economics and Political Science)

Abstract

We study managerial incentive provision under moral hazard in a firm subject to stochastic growth opportunities. In our model, managers are dismissed after poor performance, but also when an alternative manager is better able to grow the firm. The optimal contract may involve managerial entrenchment, such that growth opportunities are foregone after good performance. Firms with better growth prospects have higher managerial turnover and more front-loaded compensation. The use of golden parachutes is suboptimal, unless the firm needs to incentivize its managers to truthfully report the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract may imply excessive retention.

Suggested Citation

  • Ronald W. Anderson & Cecilia Bustamante & Stéphane Guibaud, 2013. "Agency, Firm Growth, and Managerial Turnover," Sciences Po publications info:hdl:2441/2gg54vdji29, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/2gg54vdji291pb220pomk85ev8
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    File URL: http://spire.sciencespo.fr/hdl:/2441/2gg54vdji291pb220pomk85ev8/resources/agency-growth-turnover-01122013.pdf
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    References listed on IDEAS

    as
    1. Dirk Jenter & Katharina Lewellen, 2015. "CEO Preferences and Acquisitions," Journal of Finance, American Finance Association, vol. 70(6), pages 2813-2852, December.
    2. Catherine Casamatta & Alexander Guembel, 2010. "Managerial Legacies, Entrenchment, and Strategic Inertia," Journal of Finance, American Finance Association, vol. 65(6), pages 2403-2436, December.
    3. Gian Luca Clementi & Hugo A. Hopenhayn, 2006. "A Theory of Financing Constraints and Firm Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 229-265.
    4. Daniel F. Garrett & Alessandro Pavan, 2012. "Managerial Turnover in a Changing World," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 879-925.
    5. Quadrini, Vincenzo, 2004. "Investment and liquidation in renegotiation-proof contracts with moral hazard," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 713-751, May.
    Full references (including those not matched with items on IDEAS)

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    Keywords

    Agency; Firm growth; Managerial turnover;

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